Despite the clear indications that better times are ahead, many business owners remain cautious about advertising spending their money on advertising, despite the overwhelming evidence that now is the time to advertise, before it’s too late.
When the economy slows down, many companies cut back on their advertising and marketing. It’s an easy way to cut costs and improve the bottom line. It seems like an easy decision because sales don’t usually drop off right away. The business owner may think that they can just turn their advertising back on in a few months when things improve.
The business owner is only enjoying a false economy while causing serious damage to their brand and market share. When they decide to start advertising again they no longer have their original market position and they find it takes much more to regain their position than they originally saved.
In the mid 1960s, the General Electric Company developed a research project called the Profit Impact of Market Strategy. The study was established as a project at the Harvard Business School. The goal of the project was to provide business managers a database of case studies against which they could “reality test” and strengthen their strategic thinking. In 1975, to facilitate the evolution of the program beyond the academic stage to an operating system, PIMS was organized as an autonomous institute, the Strategic Planning Institute (SPI), a non-profit corporation.
One of the major studies at the Institute has been to follow the advertising and marketing activities of companies for more than thirty five years. The study found that reducing ad spending during recessions can improve a company’s return on capital. However, the study clearly indicates those companies that cut their ad spending grew far less quickly in the years following a recession than the companies that maintained or increased their advertising spend.
Over the years hundreds of studies have been conducted to prove companies should maintain advertising during a recession. In the 1920’s advertising executive Roland S. Vaile tracked 200 companies through the recession of 1923. He reported in the April 1927 issue of the Harvard Business Review that the biggest sales increases throughout the period were rung up by companies that advertised the most.
After World War II, the Buchen Advertising Agency decided to plot the sales of a large number of advertisers through successive recessions. In 1947, it began measuring the annual advertising expenditures of each company. When they correlated the figures with sales and profit trends before, during and after the recessions of 1949, 1954, 1958 and 1961, they found that almost without exception sales and profits dropped off at companies that cut back on advertising.
The Buchen studies also revealed that after the recessions ended, those companies that cut advertising spending continued to lag far behind the companies that had maintained their advertising budgets.
A 5-year American Business Press study of nearly 200 companies showed that those that cut advertising during the 1974 recession saw a decline in sales in 1975 and grew sales by 70 percent over the study period. Those that did not cut their advertising suffered no loss of sales and grew sales by 150 percent over the time period.
In the 1979 study by ABP/Meldrum & Fewsmith, covering the recession of 1974-75 and post-recession years, showed similar findings. They found that “companies which did not cut advertising expenditures during the recession years (1974-1975), experienced higher sales and net income during those two years and the two years following the recession than companies which cut ad budgets in either or both recession years.”
Recognition decreases when advertising decreases. Likewise, an increase in advertising causes an increase in recognition. Several studies on this topic have been conducted by McGraw-Hill’s Laboratory of Advertising Performance. A typical example: A manufacturer of electronics boosted 32 percent market recognition to 45 percent with 13 pages of advertising. When the ad campaign stopped, recognition fell to 37 percent. Steady ad spending during recessions results in higher sales.
The McGraw-Hill Research proved this rather convincingly when they published their study of advertising in the 1981-1982 recession. For the six-year period from 1980 to 1985, those companies that did not reduce advertising spending during the two recession years collectively increased sales by between 16 percent and 80 percent. More importantly gains made during the recession were permanent and expanded during the three years following the recession. The companies that cut back on advertising experienced little, if any, sales growth.
There are many examples of a business that benefits from spending more on their advertising budget in a recession. A MarketSense study during the 1989-91 recession shows brands such as Jif Peanut Butter and Kraft Salad Dressing spending more on their advertising and in return saw sales growth of 57% and 70% respectively. During that same time, most of the beer industry cut budgets, but Coors Light and Bud Light increased their advertising spend and saw sales jump 15% and 16% respectively. Among fast food chains, Pizza Hut sales rose 61% and Taco Bell’s 40% thanks to strong advertising support, reducing McDonald’s sales by some 28%
Some economists believe when advertisers get cold feet and cut back on advertising a recession is actually made worse. Advertising cutbacks only reduce demand and ultimately make a bad situation worse.
There have been eleven recessions since World War II so we should be experienced at dealing with doing business in recessionary times. Recessions usually last about a year so we live in recessionary times only one year out of six. In other words, five out of six years are expansionary times.
There is still a lot of business going on in a recession. The worst recession since World War II was in 1974 and 1975. GDP declined only 4.3%.
There is possibly a good side to a recession in that the economy has a tendency to purge the business world of weak companies and strong companies can move ahead and grow market share.
Now is the time to be advertising your company. Now is the time to invite your old customers to come back in and see what you can do for them. Now is the time to advertise to increase your repeat business and start finding new customers. Now is the time before it is too late.
The evidence is clear, those companies that go after the business when the others don’t, even in recessionary times, are the companies that see exponential market share growth in the years following the down turn.
In fact, during all of my research, I didn’t find a single study, not one, that indicates cutting back on advertising is a formula for future growth.
Talk to you soon.